Daily Current Affairs – 20th September, 2016Devendra Vishwakarma
WPI and CPI based inflation
We come across Wholesale Price Index (WPI) based inflation and Consumer Price Index (CPI) based inflation in news often. Let us know what these are
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What is the purpose of a price index?
- The purpose of a price index is to quantify the overall increase or decrease in prices of several commodities through a single number.
- The price index is measured at fixed intervals and changes in it are an indicator of average price movement of a fixed basket of goods and services (that represent the entire economy).
- Thus, price index is reflective of the total change in price level paid by a producer or consumer.
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What is ‘Wholesale Price Index’?
- Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers.
- WPI is used as an important measure of inflation in India. Fiscal and monetary policy changes are greatly influenced by changes in WPI.
In India, wholesale price index is divided into three groups:
- Primary Articles (20.1% of total weight)
- Fuel and Power (14.9%) and
- Manufactured Products (65%)
- Primary Articles
- Food Articles
- Non-Food Articles
Food Articles from the Primary Articles Group account for 14.3%of the total weight.
- Fuel, Power, Light & Lubricants
- Mineral oils
- Manufactured Products
- Food products
- Beverages, Tobacco and Tobacco Products
- Leather and leather products
- Wood and wood products
- Paper and paper products
- Rubber and plastic products
- Chemicals & chemical products and
- Several others.
The most important components of the Manufactured Products Group are Chemicals and Chemical products (12% of the total weight); Basic Metals, Alloys and Metal Products (10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts (5.2%).
What is Consumer Price Index (CPI)?
- Consumer Price Indices (CPI) measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption.
- It is the index of price prevailing in the retail market.
- CPI is widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices.
CPI is more relevant to the customer, since it measures changes in retail prices. CPI represents basket of essential commodities purchased by average consumer-food, fuel, clothing etc.
The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it clear that CPI basket is broader than WPI basket.
Consumer Price Indices (CPI) released at national level are:
- CPI for Industrial Workers (IW)
- CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)
- CPI (Rural/Urban/Combined).
While the first two are compiled and released by the Labour Bureau in the Ministry of Labour and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
What is the difference between WPI and CPI inflation?
In the Indian context, 5 national indices are accounted for inflation measure that include WPI and other four CPI indices.
WPI based inflation:
- WPI index reflects average price changes of goods that are bought and sold in the wholesale market. WPI in India is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
- Further, the data for WPI is monitored and updated on a weekly basis taking into account all the 676 items that form the index.
- An, important point to take note of is the whole sale price index (WPI) does not includes the cost of services.
- Further, as WPI accounts for changes in general price level of goods at wholesale level, it fails to communicate actual burden borne by the end consumer.
- WPI is the primary measure that is used by the Indian central government for ascertaining inflation as WPI in contrast to CPI accounts for changes in price at an early distribution stage.
CPI based inflation:
- In contrast, CPI is computed by executing a weighted average on a particular set of goods and services.
- The computation of CPI takes into account price changes and the actual inflation that affects the end consumer.
- CPI is thus a reflection of changes in the retail pricesof specified goods and services over a time period which are traded by particular consumer group.